INDONESIA is one of the hottest markets for businesses looking at tapping Asia’s rapid growth, and Singapore companies which already know the country should start looking at its mineral-and energy-rich eastern islands.

That’s the view of Stephen Bailey, chief executive officer of the Frontier Strategy Group (FSG), a Washington- based political risk consultancy with offices in the major markets of the world. In an interview with BT, Mr Bailey pointed out that given the size of its population and steady increases in household income, Indonesia is catching up with many higher-profile markets in Asia.

‘At 230 million, its population is significantly larger than Brazil’s. Income per capita is still low, comparable to India’s,but we expect to see 2010 having registered a 25 per cent increase. That translates into a huge opportunity for consumer-facing industries, which we expect to grow at least 15 per cent per year over the next four years,’ he said.

However, Mr Bailey cautioned against looking at Indonesia as one vast country. Rather, it should be viewed as a diverse mix, with multiple languages, significant intra-country transportation costs, and a pervasive ‘insider’ culture. With that in mind, executives are being advised to take a staged approach to investment – that is, start in Jakarta and the island of Java and then move to the eastern islands.

But Mr Bailey suggested that Singapore companies which know Indonesia well should start looking at the eastern islands, where the discovery and production of natural gas and other resources is drawing investors and funds from the region. This is despite the eastern islands being currently underdeveloped and underserved. These islands have significant business potential that is currently untapped by foreign companies, he added.

Big investments in agriculture too can be expected over the next five years as Indonesia adds a range of food crops to its plantations to support its booming population. ‘We are encouraging companies to build relationships with key government players now to position themselves for investment incentives for seeds, fertilisers and other inputs.’

The business mentality too is changing in the country as a new generation takes over family-owned businesses, bringing new demands for professional and technical services. ‘The previous generation would own a portfolio of small businesses and maintain less profitable businesses for the sake of relationships or diversification. The younger generation now taking over is focused on the bottom line and is selling non-core assets, expanding regionally, and upgrading the infrastructure. We recommend that executives in ICT, banking and other professional services focus on these opportunities.’

The business environment is also being helped by a forward-looking government in Jakarta, he said. This latest call to look to Indonesia comes just as the populous country moves closer to attaining a top investment rating. Rating agency Moody’s recently upgraded Indonesia’s sovereign debt to within one notch of investment grade at Ba1, placing Indonesia just slightly below the BRIC nations (Brazil, Russia, India and China).

Indonesia has also found favour with foreign investors in the past two years for having handled the global financial crisis well. The stock market was among the world’s top performers last year and its inflation has been kept reasonably under control. ‘Indonesia’s economic resilience is accompanied by sustained macroeconomic balance,’ Moody’s said when announcing the rating upgrade.

For the Frontier Strategy Group – which has now opened offices in Shanghai and Chengdu in China – Indonesia-watching has taken on a higher profile with more of its Western clients showing interest in diversifying and seizing opportunities in Asia. ‘Based on our ongoing tracking of executive priorities, Indonesia is the sixth most-watched country across global markets, coming in just after the BRIC nations and Mexico. This is up from 10th place in 2009,’ Mr Bailey told BT. ‘In 2009, only 30 per cent of our clients were monitoring Indonesia through our proprietary Market- View software. In 2010, that number passed 40 per cent and it is only going higher. Today, most consumer- oriented businesses remain centred in Jakarta and on the island of Java. But we see opportunities being thrown up in the eastern areas as growth accelerates and the economy opens up.’

While highlighting the positive aspects of Indonesia as a lucrative investing opportunity, the corporate attorney-turned-business and political risk consultant acknowledges that there are some major challenges in tackling this huge market. Corruption, distribution and product localisation are the key risks, he said.

‘Some questions had been raised about the (Indonesian) president’s commitment to fighting corruption. Still, many of the executives I speak to believe that Indonesia’s level of corruption is lower than Thailand’s or the Philippines.’ ‘We think Indonesia is squarely in the middle of the road when you compare its risk levels to other emerging markets in the region. Though we have seen a number of highly publicised political challenges in 2009, Indonesia’s democracy appears to be strong, and it is not plagued by the currency challenges that have destabilised Vietnam.’

Distribution is another major hurdle, given the scale and physical complexity of the region. Many multinationals choose to take a staged approach to investment, starting in Jakarta and on Java island, where modern retail is an attractive distribution channel. To penetrate deeper in the market, many MNCs rely on local wholesalers and distributors, and often face challenges monitoring and incentivising their partners.

‘A common mistake I see companies make is not conducting due diligence around consumer preferences and product localisation,’ said Mr Bailey. He pointed out, for instance, that multinationals often enter the market offering large packages that are too expensive for Indonesian consumers. ‘The consumer market is large enough that it is well worth the investment to conduct extensive market research,’ he advised. (*)